What is an Open-Ended Investment Company?
An open-ended investment company, or OEIC, is a corporation that is formed in order to own a collection of investments. Shares in the open-ended investment company are sold to investors with the goal of making a profit. An open-ended investment company may also be called an Investment Company with Variable Capital, or ICVC. These types of companies are formed in the United Kingdom and are similar to mutual funds in the United States and sociétés d'investissement à capital variable, or SICAVs, in Europe.
Shares of an open-ended investment company are listed on the London Stock Exchange. Note that this is different from most U.S. mutual funds, which are bought and sold independent of stock exchanges. The exception in the United States is the exchange-traded fund, or ETF, which does trade on a stock exchange.
These companies are referred to as open-ended investment companies because they can increase the size of the fund by taking in more money and issuing more shares. The size of each so-called open-end fund is dictated by the number of investors who wish to own it. In cases where a fund becomes too large, the fund manager may close the fund to new investors, but those who already own the fund can purchase additional shares. It is possible for a fund to close to all new purchases, but this is very rare.
Some types of open-ended investment companies, called unit investment trusts in the U.S. and unit trusts in the U.K., may expire at a certain point in time. The trust is formed to invest in companies with a certain profile, such as growth or value, small cap or large cap. The stock is purchased when shares of the trust are bought by investors. When the expiration date arrives, the shares are liquidated and those who own shares in the trust are paid the value of their shares at that time.
Some trusts are unmanaged, which means that a certain number of shares of several companies are purchased when the fund is opened, and no other trades are made. More common are managed trusts, which have a fund manager who is responsible for monitoring the performance of the stocks in the trust or OEIC to be sure that they are performing adequately. The manager has the ability to sell underperforming assets in the trust and replace them with the stocks of companies that are more likely to have better returns.
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